As market indices continue to plummet, another chestnut of conventional investing wisdom has emerged: “It’s a stock picker’s market.” Now that you can’t make money riding the tape, you just have to pick the winners and jettison the losers. Right?
Wrong, says Kenneth French, professor of finance at Tuck and the director of investment strategy at the phenomenally successful Dimensional Fund Advisors. (If the name “French” sounds familiar, it’s probably because you’ve heard the names “Fama and French” come up over and over again whenever someone is discussing the most important academic work on investing in the last 25 years.)
Professor French and his co-author Eugene Fama wrote the defining papers on how value stocks and small stocks have outperformed the overall market over the last century. Firms like Dimensional have since used this research to produce returns that blow away those of most traditional mutual fund managers (who use traditional stock-picking) and even some plain vanilla index funds. In the process, Dimensional has amassed more than $100 billion of assets under management.
Despite the battering the markets have taken over the past year, Professor French and Dimensional are still happy to let everyone else conclude that this is “a stock-picker’s market” and batter their returns by competing against each other. In the video above, Ken explains why, on average, this strategy is guaranteed to lose.
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